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The escalating U.S.-Israel diplomatic crisis will dramatically change the calculus for the upcoming AIPAC policy conference, which starts on Sunday, in ways difficult to predict.

Secretary of State Hillary Clinton is scheduled to be the top administration speaker, and you have to bet AIPAC leaders are nervous about how she will be received by the 3000-plus delegates after her tongue-lashing call to Prime Minister Benjamin Netanyahu last week.

While Israeli officials right up to Defense Minister Ehud Barak say the announcement of 1600 new housing units in an East Jerusalem neighborhood during Vice President Joe Biden’s visit was a “mistake” and Washington is buzzing about the diplomatic slap in the face, AIPAC was putting the blame for escalation on the administration.

"The Obama Administration’s recent statements regarding the U.S. relationship with Israel are a matter of serious concern,” the group’s leaders said in a statement. “AIPAC calls on the Administration to take immediate steps to defuse the tension with the Jewish State. The Administration should make a conscious effort to move away from public demands and unilateral deadlines directed at Israel, with whom the United States shares basic, fundamental, and strategic interests.”

Predictably, this theme emerged: the U.S. violated its friendship with Israel by taking its concerns (over a painfully public diplomatic insult to Biden, by the way) public.

"We strongly urge the Administration to work closely and privately with our partner Israel, in a manner befitting strategic allies, to address any issues between the two governments,” AIPAC leaders said in the statement.

With the AIPAC meetings starting on Sunday, there is intense speculation here about the impact on the conference of a crisis Israel’s ambassador to Washington, Michael Oren, reportedly called the worst in 35 years.

Will Clinton still show? Will she come, and use her speech to amplify her demands on Israel, or will she try to tamp down the crisis in her speech?

A bigger question for AIPAC: will Clinton get a hostile reception? A secretary of state who gets booed would be an embarrassment for the group, and further inflame a crisis you have to believe AIPAC doesn’t see as good for Israel or for itself. How will a hostile or even a chilly reception affect the group’s access and influence with the administration?

And what about Netanyahu?

A few days ago, it seemed like he had avoided the potential embarrassment of having once again to beg for an Oval Office meeting because this time President Barack Obama was scheduled to be in Indonesia during the prime minister’s visit for an AIPAC gathering.

But Obama is sticking around to push his health care reform proposal and may still be here when Bibi touches down – which will inevitably lead to fears on the Israeli side that there will be at least the perception of a snub if the prime minister isn’t welcomed at the White House.

But he will will find many congressional Republicans eager to embrace him – and to use the perception of a U.S. overreaction to score political points against the hated Obama administration. Will Netanyahu focus on generating congressional back pressure against the administration, or will he emphasize mending fences with the administration?

Exploiting partisan divisions over administration foreign policy could be a boost for the embattled prime minister – but it is a highly risky strategy, given the reality that he must work with this president until at least 2013.

The ruckus has to be a mixed blessing for AIPAC.

Nothing galvanizes its dedicated troops so much as a big battle with an administration, and nothing draws the press to its conventions like political strife. You can bet the Hillary Clinton speech will be the hottest ticket in town for reporters.

But you also have to think AIPAC is nervous; the Jerusalem housing decision, and the perception it was either a deliberate slap in Biden’s face or an act of monumental incompetence, isn’t exactly helping Israel’s image, and some Jewish leaders have expressed concern about the impact it is having on the non-activist Jewish community, which they believe is already losing its connection to the Jewish state.

AIPAC hasn’t faced a real showdown with an administration in a long time. Depending on how things go as the policy conference opens, one may be right around the corner.

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